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Growth of Privatization Deals Nets Big Fees for FirmsNew multibillion-dollar market expected to expand as cash-strapped local and state governments look to lease public assets
From Chicago's Midway Airport to Florida's Everglades Parkway, law firms are aiding a revolution in financing of U.S. infrastructure projects as they craft transactions that let local and state governments lease public assets to eager private investors. Firms collectively stand to reap tens of millions of dollars in fees from the deals, which started cropping up in the U.S. only five years ago. With demand expected to increase, some firms are now shifting attorneys into the practice area.
The National Law Journal2008-06-16 12:00:00 AM
From the Pennsylvania Turnpike to Chicago's Midway Airport to Florida's Everglades Parkway, law firms are aiding a revolution in financing of U.S. infrastructure projects as they craft transactions that let local and state governments lease public assets to eager private investors.
While governments around the world, particularly in Europe and Latin America, have shifted the operation and maintenance of public facilities -- such as airports, roads and ports -- to private entities for decades, such privatization efforts cropped up in the United States just five years ago and are expanding rapidly.
The new multibillion-dollar market has created lucrative work for law firms in representing governments, bidders and lenders. Mayer Brown; White & Case; Sullivan & Cromwell; Debevoise & Plimpton; and Nossaman Guthner Knox & Elliott -- as well as some British firms such as Freshfields Bruckhaus Deringer -- are specializing in the so-called public-private partnerships, or P3 deals, building on their expertise in global project development and complex financial transactions.
At the same time, smaller firms such as Indianapolis' Ice Miller and Philadelphia's Ballard Spahr Andrews & Ingersoll are taking local pieces of the action. And some firms are finding that the burgeoning practice is a good place for lawyers whose work in other practices has slowed because of the economy.
SOURCE OF NEW REVENUE
Two things drive the trend: the need of state and local governments to revitalize aging public infrastructure while hamstrung by limited budgets, and the promise of new funds raised by the transactions to use in new projects. For private investors, the deals offer a relatively secure and stable investment in assets that can produce steady revenues under supervision by experienced operators that often are foreign companies.
"Cities and states have discovered that they have assets that are enormously valuable in what has become a world infrastructure market," said John Schmidt, a Mayer Brown partner who led the Chicago law firm's work on the Pennsylvania Turnpike project. "You have investors that are very interested in acquiring those assets."
Mayer Brown was at the genesis of the recent surge when it represented the city of Chicago in its lease of the Chicago Skyway for $1.83 billion in 2005 and in its work with Ice Miller on the lease of the Indiana Toll Road for $3.8 billion the following year.
Public toll roads, bridges, airports and even parking facilities that could be put in private hands total more than half a trillion dollars. Investors are ready to plow more than $500 billion into such assets, Mayer Brown estimated in materials presented at a May conference on the topic. About $20 billion in U.S. deals have been done, Schmidt said.
Law firms collectively stand to reap tens of millions of dollars in fees from the transactions, even while taking on some financial risk. The government entities often have two law firms, including a more experienced national player as well as local counsel, while the bidders and lenders have their own attorneys.
The 75-year Pennsylvania Turnpike lease went last month to a consortium led by a Citigroup Inc. infrastructure unit and the Spanish company Abertis Infraestructuras S.A. for $12.8 billion, the most valuable U.S. deal to date.
Mayer Brown and Ballard Spahr advised the state and have collectively earned more than $3 million in fees so far. Debevoise represented the winning bidders.
"State and local governments were and still are under a lot of budgetary pressures," said Ivan Mattei, who is co-head of Debevoise's project infrastructure group. "The need to rebuild and build new infrastructure increases by the day."
Mayer Brown drew up the turnpike concession agreement that includes the lease terms. Ballard Spahr vetted the agreement in view of Pennsylvania laws on real estate, labor, public safety, environmental and tax considerations. Bidding took place on a fixed contract and the highest bid won.
In the typical transaction, a government makes a request for proposals, the terms are discussed with bidders during a certain period, and bidders get access to financial data related to the assets. The submission of bids by interested investors then follows.
After the winning bid is selected, what remains is financing the transaction, meeting conditions, finishing documentation and perhaps dealing with legislative approvals or litigation.
Lawyers in the area expect the deals to keep coming. Efforts underway include Chicago's plan to privatize operation of Midway Airport, Florida's consideration of "monetizing" the Everglades Parkway (known as "Alligator Alley") and Oregon's plan to privatize the Port of Portland shipping terminal.
"This is a market that is expanding and will continue to expand," said Ned Neaher, a partner based in the Washington, D.C., office of White & Case. "It's here to stay, even though politically it takes some education to bring people around to the concept that private-equity investment in public infrastructure is a good thing."
Some firms expect so much new work in the area that they are shifting attorneys, including some idled by the slowdown in mergers and acquisitions, to work on P3 deals.
Mayer Brown may double the number of attorneys working on such deals if current demand continues, Schmidt said.
California-based Nossaman Guthner added three more attorneys to its infrastructure group last month. White & Case now has "substantial resources" devoted to the area compared with nothing five years ago, Neaher said.
LOOKING TO EUROPE
Law firms gaining a foothold in the area are mainly landing the work through long-time ties to government entities or by way of expertise and connections gained in infrastructure work in Europe and Latin America.
"This is one of the few examples where you take expertise and knowledge gained outside the U.S. and apply it inside the U.S.," said Neaher, whose firm represented the Spanish Cintra S.A. and Australian Macquarie Group Ltd. consortium in its successful 2006 bid for the Indiana Toll Road.
Mayer Brown has benefited from Schmidt's long-time ties to Chicago. After the Chicago Skyway deal was completed, Chicago Mayor Richard Daley turned to him and said: "What else?" Schmidt said.
Mayer Brown is now representing Chicago in its consideration of six bidders for the Midway lease, and there are about 20 law firms working for various parties on the transaction, Schmidt said.
Debevoise and Sullivan & Cromwell, both New York-based firms, are among those representing Midway bidders, attorneys at those firms said.
Freshfields is representing the Florida Department of Transportation as it mulls leasing the 78-mile tolled Intrastate Highway 75 across the southern part of the state, known as Alligator Alley for the wildlife terrain it traverses. Debevoise is representing a consortium bidding for the lease, Mattei said.
In addition, several states, including Illinois, California and Texas, have considered privatizing lotteries, and a few cities, including Chicago and Harrisburg, Pa., are contemplating the lease of parking facilities. Chicago in 2006 raised $563 million by leasing four city public parking garages for a period of 99 years.
Cash-strapped state and local governments are desperate for new sources of financing, especially for aging roadways and bridges, partly because the rising price of gasoline makes new fuel taxes unattractive. While the P3 deals often prompt protest from residents who don't want to see tolls rise and in some cases are leery of foreign owners, the transactions have gained momentum during the past two years.
"Like anything else that's driven by public policy, the extent to which it takes is really driven by political dynamics," said Fred Rich, the global project development and finance practice at Sullivan & Cromwell, where experience in the area reaches back to work on the Panama Canal in 1911.
The Pennsylvania Turnpike transaction stalled last year, but it was revived after some residents complained about an alternative funding plan that would implement new tolls, and after a decrepit bridge in Minnesota collapsed, killing 13 people, said Adrian King, an attorney for Ballard Spahr who worked on the deal for the state. The deal is still subject to legislative approval, and the Pennsylvania Turnpike Commission has been fighting the proposal, he said.
The key to getting any of the deals done is making certain that they allocate the risk between the public and private entities in a way that is financeable, Mattei said.
Mayer Brown is even sharing the risk in the Midway deal by earning less than half of some of its regular rates, but the firm will get the full payment if the transaction closes, Schmidt said. The firm is working at 85 percent of regular rates in the Pennsylvania transaction and won't get additional compensation at closing in that deal, he said.